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Managing Financial Risks - Essay Example

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This essay "Managing Financial Risks" discusses ways to manage risks which also includes the types of financial risks, types of capital structure, financing arrangements of the project, analysis of relevant project agreements, identification of potential impacts of regulatory issues, and key risk management method…
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Managing Financial Risks
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Download file to see previous pages Types of financial risks that are typically found in the renewable energy sector may be different from other industry sectors. “Financial risks facing a company typically are those that exist because of market volatility” (Zolkos 2003). However, the amount of risk of the project depends on our perspective (Ibid). Generally, lenders are focusing on the ability of the borrowers to meet their financial obligation and each lender makes the decision to issue the financing based on different factors. For example, an equity investor may want to base his decision on an estimation of the risk-adjusted return of the project.
For renewable energy, the risk can easily be managed especially for on-grid renewable energy but the off-grid has a different business model. Seeing the nature of the project itself, financing tends to be the greatest risk because it requires huge capital outlay. According to SEFI, the projectability to service its debt is another risk associated with renewable energy.
Besides business and financial risks, there are also technological risks, investment costs, current annual costs, and inflation. Technological risk is due to the cost. Financial institutions do not assume the risk of this kind of investment but the government does through bilateral or multilateral schemes. The technological risk may also involve the nature of the primary source of energy such as in the case of wind energy and win farm. The risk involves the “direction, speed or hourly duration of wind blowing will not meet the necessary criteria may affect the operational costs” (Balkan Energy 2007).
According to Balkan Energy (2007), as in its experience, the business risk for renewable energy may include the possibility of the adverse effect of the market and the position of the company in the market. “The level of price parameters” or price preferential and the level of electricity to be generated by wind farm sites. The level of price parameters, said the  Balkan Energy, are the “amount of investment costs, including the costs for grid connection to the respective transmission or distribution network; average annual output of wind farm sites. ...Download file to see next pagesRead More
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